Good credit is very important. Adults need to build a good credit rating so that banks and other lending institutions will consider them financially trustworthy. While there are people who go to lenders to maintain their good credit rating, others go because they simply need money.
People go to banks and lenders to get a loan, which is a type of debt. A loan, in other words, is money lent to a consumer to be returned with interest.
Debt, by definition, refers to goods, money or services owed by a person or entity from another person or entity. There are four types of credit or debt, long-term and short-term credit, and secured and unsecured credit.
Long term credit refers to the type of credit one would have with a mortgage, car loans, or other installment loans, which are repaid over months or years. Short term credit, on the other hand, is used to purchase items or services that are to be paid for in a single payment within a given period of time, usually with no interest charge.
A secured loan is credit that one can get by pledging something of value to the lending institution. By identifying the collateral, the lender will have a guarantee that the loan will be repaid.
An unsecured loan, on the other hand, is credit that is granted based on the financial trustworthiness of the borrower alone. Because the borrower does not pledge any collateral, the lender is at greater financial risk. Therefore, unsecured loans have higher interest rates than secured loans.
A personal loan or signature loan can be a secured loan, but most of the time, it is given without collateral. It is the fastest way to get cash for personal use.
There are several points that one must consider before signing up to get a personal loan.
Below are some investment terms.
APR
Annual Percentage Rate is the yearly interest rate charged to borrowers on top of the loan. Normally, the lending institution will compute for the APR using a method called risk-based pricing. The lender will calculate a borrower’s credit score using a scoring model. A higher APR will be given to a borrower who is considered high-risk, or who has bad credit.
To compute for the credit score, lenders usually pull up the borrower’s credit report from any of the major credit bureaus (Trans-Union, Equifax, or Experian). They normally use scoring models established by the credit bureaus, such as FICO, Beacon, or Plus scoring models, to come up with the score, or they can use in-house scoring models to determine a borrower’s credit rating.
Penalty charges
Some people believe that borrowing money and paying before the loan matures is a good way to save, but the opposite is true. Some companies charge borrowers additional interest (equivalent to 1-2 months) for early repayment.
PPI
A Payment Protection Insurance guarantees a borrower that the loan will be charged off in the event that he becomes ill or loses his job. While this is important, some credit counselors advise against getting insurance for personal loans. Most lenders include the price of the insurance with the loan, thereby increasing the interest rate.
Because personal loans are easily available to anyone, credit counselors also advise that borrowers consider the following:
Affordability
This should be taken into consideration first of all. To determine if the personal loan is affordable, one should make sure that the monthly installment is less than or equal to 5% of one’s monthly income. To illustrate, a borrower who has a $500 monthly salary should only get a personal loan which charges a monthly installment of $25 or less.
Need
A borrower should determine if getting a personal loan is urgent and necessary. If the personal loan application can be postponed then it will be best to look into other alternatives first than be given a high interest rate on something that is not really needed.
Loan amount
Again, compute for the exact amount that you need as against what you can pay.
Lender
Although a lot of people go to banks to get personal loans, there are other lending institutions that one can consider. Lenders advertise in the internet, in newspapers, on television, and even in the supermarkets, and most of them offer lower interest rates than what major banks are offering, since there is stiff competition among lenders.
Research
The most important thing of all is research. Read the fine print before signing up for a personal loan, and make sure to compare and contrast offers before deciding to be able to repay your loan hassle-free.
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